reduction in sugar conversion cost

Reduction in Sugar Conversion CostDilip S. PatilFinance Manager

Padmabhushan Krantiveer Dr. Nagnathanna Nayakawadi Hutatma Kisan Ahir S.S.K. Ltd.,Nagnathanna Nagar, Walve, Tq. Walava, Dist. Sangli. Email: [email protected]

Mobile 9637764111, 8275304763

ABSTRACT

“Reduction in sugar conversion cost is need of time in uncertainty of situation. The paper is based on how to reduce theconversion cost in sugar to survive in odd time, the overall financial management of sugar industry and how to earnprofit even after making more expenditure. This Paper is focusing on formula method of analyzing income andexpenditure by making comparative study.”

Introduction

Conversion cost is the cost required to convert Raw material into finished goods. As the conversion cost is less profits canbe increased and it will also help to be competitive in the market. Cost management is the key to survival in a competitiveglobal industry. This paper is concern here how to minimize sugar manufacturing cost from factory point of view. Herequality should be maintained but unit or single output cost per unit (marginal cost per unit) should be reduced possibleextent using best and latest cost management techniques. Basically sugar industry is not having any control over thesugarcane cost and as well as selling price of sugar. So the sugar industry need to focus on the conversion cost incurredduring the time of production of sugar from sugar cane here effective and efficient cost control should be adopted.

Areas of Cost Reduction

Fuel oil and Lubricant By following preventive maintenance consumption can be reduced.

Power Power must be used whenever necessity arises. Switching off the motors, pumps whennot in use. Modernizing the boiler, co-generation of power. Using LED lighting in factorypremises.

Packaging materials Correct use of Gunny /PP bags.

Repairs and maintenance By preventive maintenance, quality spares and technical modifications.

Steam production Bagasse consumption, Firewood, Steam economy, Exhaust utilization.

Financial Management Quick disposal of finished and co products by tapping the market when prices are high

Repairs & Maintenance By Preventive Maintenance, by procuring Quality Spares, by Technical Modifications

Administrative cost By reducing overtime cost, by reducing expenses on stationery, guest house, vehicle etc.

Miscellaneous – Cost reduction in purchase, cost reduction in sugar selling, Inventories.

Cost Management Techniques

1. Cost Comparison

It is not possible to accept an advice given by anyone i.e. to reduce expenditure; instead we can analyze the factoryexpenditure. To analyze expenditure is the best technique for cost control. If we have not analyzed the expenditurethen we will not able to understand whether our expenditure is increasing or decreasing. For analyzing expenditure youhave to compare the current year expenditure with the last year expenditure of your own mill and also with the othersugar mills having good financial management. The specimen is given as under:

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a. Intra Firm Comparison Intra firm comparison means comparing the figures of income and expenditures of current year with last year figures.By this comparison we shall come to know the current year’s income & expenditure is more or less and what are theexact reasons of variance. Detail analysis of Income and Expenditure pertaining to the year 2011-12 & 2012-13 of “X”Sugar Mill is given below.

Income & Expenditure (Per MT. of cane) for the year 2011-12 and 2012-13 2012-13 2011-12

A) Particulars Income Rs. PMT.Increase Decrease

Cane Crushed in M.T. 758665.540 832982.899 74317.3691 Production Value of sugar 3591.73 2694.75 896.98 0.002 Co- Product Value 207.53 380.65 0.00 173.123 Distillery Income 10.86 79.2 0.00 68.344 Co-gen Income 39.31 -33.96 73.27 0.005 Solar Power Income 4.10 -6.07 10.17 0.006 Other Income 33.11 21.78 11.33 0.00

Total Income. 3886.64 3136.35 991.75 241.46

B) Variable cost Rs.PMT.

1 Cane Cost 2344.29 2039.42 304.87 0.002 H & T Expdr. 485.39 440.15 45.24 0.003 Machinery Repairs & Main. 62.65 68.57 0.00 5.924 Process Chemical Expdr. 24.22 24.22 0.00 0.005 Packing Expdr. 40.05 53.09 0.00 13.046 Electrical Expdr. 15.64 147.15 0.00 131.517 Production Overheads 41.02 24.91 16.11 0.008 Salary & Wages (20%) 17.30 15.45 1.85 0.009 Interest on working Capital 135.74 102.04 33.70 0.00

Total Variable Cost 3166.31 2915.00 401.78 150.47

C) Contribution Per M.T.( A-B) 720.33 221.35

D) Fixed Cost Rs. In Lakh.

1 Administrative Cost. 1365.90 821.22 544.68 02 Interest on Term Loan 205.75 29.61 176.14 03 Salary & Wages (80%) 524.90 514.7 10.20 04 Depreciation 668.34 452.80 215.54 0

Total Fixed Cost 2764.89 1818.33 946.56 0

E) Total Contribution (C x Currentyears crushing of “X” Sugar Mill)

5464.92 1843.81

F) Net Profit ( E – D ) Rs. in Lakh 2700.02 25.48

* Data Source: Annual report published by respective sugar mill

Variance Analysis (Rs. In Lakh)

Sr.No Particulars FavourableVariances

AdverseVariances

Formula

1 Increase in sugar production value

6805.08 PMT Sugar Production value xCurrent year’s crushing

896.98 x 758665.5402 Decrease in Co- product

Income 1313.40 Diff. in income x Current year

crushing 3 Decrease in Distillery


crushing 4 Increase in Co-gen.


crushing 5 Increase in Other income 85.96 Diff. in income x Current year

crushing 6 Increase in Solar income 77.16 Diff. in income x Current year

crushing 7 Increase in cane cost 2312.94 Diff. in Cane Price x Current year

crushing

8 Increase in H & T Expdr. 343.22 Diff. in Expdr. x Current year crushing

9 Decrease in Machinery repairs and maintenance

44.91 Diff. in Expdr. x Current year crushing

10 Decrease in Packing Expdr.


11 Decrease in power cost 997.72 Diff. in Expdr. x Current year crushing

12 Increase in Mfg. overheads

0.00 122.22 Diff. in Expdr. x Current year crushing

13 Increase in Salary & wages(20%)


14 Increase in Interest on working capital


15 Loss due to less crushing (Reduced crushing 74317.37 M.T)

164.52 Less crushing – 74317.37 M.T. x Lastyear’s contribution

16 Decrease in fixed cost 946.56 Decrease in fixed cost

Total 8665.63 5991.05

(+) Last year profit 25.44

(-) Adverse variances 5991.05

Current year’s profit 2700.02

b. Inter Firm Comparison

Inter firm comparison means comparing the Income & Exp. of two different factories to realize where we are actuallystood as compare to other sugar mill. By this comparison we shall come to know the mills income & expenditure ismore or less and what are the exact reasons of variance. Detail analysis of Income and Expenditure pertaining to theyear 2012-13 of “X” Sugar Mill with reference to “Y” Sugar Mill is given below.

Comparison of PMT. Income & Expenditure between “X” Sugar Mill & “Y” Sugar Mill for the year 2012-13

Income ( Rs. PMT.)A) Particulars “X” Sugar Mill “Y” Sugar Mill Increase Decrease

1 Cane Cost 2344.29 2703.22 358.92 0.00

2 H & T Expdr. 485.39 567.77 82.38 0.00

3 Machinery Repairs & Main. 62.65 55.03 0.00 7.62

4 Process Chemical Expdr. 24.22 39.62 15.40 0.00

5 Packing Expdr. 40.05 53.74 13.69 0.00

6 Electrical Expdr. 15.64 0.00 0.00 15.64

7 Production Overheads 41.02 148.76 107.73 0.00

8 Salary & Wages (20%) 17.30 57.30 40.00 0.00

9 Interest on working Capital 135.74 160.19 24.45 0.00

Total Variable Cost 3166.31 3785.62 642.58 23.27

C) Contribution Per M.T. (A-B) 720.33 715.89

D) Fixed Cost Rs. In Lakh.

1 Administrative Cost. 1365.90 541.24 0.00 824.66

2 Interest on Term Loan 205.75 0.00 0.00 205.75

3 Salary & Wages (80%) 524.90 1651.57 1126.66 0.00

4 Depreciation 668.34 1339.21 670.87 0.00

5 Share Redemption Funds 0.00 1537.03 1537.03 0.00

Total Fixed Cost 2764.89 5069.05 3334.56 1030.41

E) Total Contribution (C x Current years crushing of “X” Sugar Mill)

5464.92 5158.99

F) Net Profit ( E – D ) Rs. in Lakh 2700.02 89.94

Variance Analysis (Rs. In Lakh)

Sr.No Particulars FavourableVariances

AdverseVariances

Formula

1 Increase in Co- product income

12.21 Diff. in Income x crushing of“X” Sugar Mill

2 Decrease in Distillery Income


3 Increase in Co-gen. Income 115.39 Diff. in Income x crushing of“X” Sugar Mill

4 Decrease in other income 393.14 Diff. in Income x crushing of“X” Sugar Mill

5 Increase in Solar income 31.11 Diff. in Income x crushing of“X” Sugar Mill

6 Decrease in cane cost 2723.00 Diff. in Income x crushing of“X” Sugar Mill

7 Decrease in H & T Expdr. 624.99 Diff. in Income x crushing of“X” Sugar Mill

8 Increase in Machinery repairs and maintenance


9 Decrease in process chemical


10 Decrease in Packing Expdr. 103.86 Diff. in Income x crushing of“X” Sugar Mill

11 Increase in power cost 118.64 Diff. in Income x crushing of“X” Sugar Mill

12 Decrease in Mfg. over head 817.39 Diff. in Income x crushing of“X” Sugar Mill

13 Decrease in Salary & wages (20%)


14 Decrease in Interest on working capital


15 Profit due to Excess crushing (Increase in crushing 38025.54 M.T)

272.22 Increased crushing 38025.54MT x contribution of “Y” Sugar

Mill16 Decrease in sugar

production value3203.01 Diff.in Income x Rate of “Y”

Sugar Mill

17 Increase in fixed cost 2304.15 Increase in fixed cost

Total 7610.12 5000.04

(+) Last year profit 89.94

(-) Adverse variances 5000.04

Current year’s profit 2700.02

Here we have to see what the cost per metric ton is? and in case of packing material how much per bag expenditureincurred is important. While comparing the financial results of two sugar mills, both the mill has to follow theuniform accounting systems. The comparison of variable cost done with per metric ton of expenditure and in caseof fixed cost it is with how much rupees spent in Lakh. Follow the same method for Standard cost too.

2. Increase Profit by Increasing Expenditure

Let’s take an example; here some imaginary figures of per metric ton of expenditure have been taken to understandhow we will gain profit by increasing expenditure.

We all know that, ascrushing increases, thePMT expenditure offixed cost comes down& if crushingdecreases this ratiowill increase. Now weshall have discussionon a different idea,which is how one cangain more profit byincreasing expenses.Now let’s have anexample. We arebringing sugar canefrom gate-cane for ourcrushing. But thesituation is like this,we have to crush 4Lakh MT of sugarcane& our production costis Rs.1600 PMT & the

production value is also Rs.1600 PMT. It means we are in the stage of no profit no loss (BEP position)

If we crush additional 1 Lakh MT of sugarcane from gate-cane, then the average harvesting & transportingexpenses for this additional 1 Lakh MT is more by Rs.100 PMT. In that case what will be general assumption?Rs.1600 plus Rs.100 additional expenditure, total expenditure is Rs.1700 PMT. So our income is reduced by Rs.100PMT. Let’s calculate the income & expenditure if we crush 5 Lac MT of sugarcane instead of 4 Lakh MT.

SR NO.

PARTICULARS PMT EXPDR. x Crushing

Rs. Lakh

1 Variable expenditure 1400 x 4 56002 Variable cost for additional 1 Lakh crushing 1500 x 1 15003 If we divide fixed cost by 5 then the PMT

fixed cost will come down from 200 PMT to...160 x 5 800

4 Total Expenditure 1580 x 5 79005 Total Income 1600 x 5 8000

Variable Cost (Rs. PMT)

1 Cane Cost 1000.00

2 H & T Cost 160.00

3 Machinery R & M Expenses 50.00

4 Process Chemical Expenses 15.00

5 Packing Expenses 40.00

6 Factory Overheads 35.00

7 Interest on working capital 100.00

Total Variable Expenditure 1400.00

Fixed Cost

1 ´Salary & Wages 200.00

2 Interest on term loan 100.00

3 Administrative cost 300.00

4 Depreciation 200.00

Total Fixed Cost 800.00

Total PMT Expenditure Considering 4 Lakh MT Crushing

1600.00

6 Net Profit 20 x 5 100

From above calculations, the situation of no profit no loss has changed to Rs. 1/- Cr profit, though the PMT variablecost increased. We have made additional expenditure @ Rs. 100/- PMT on 1 Lac MT of sugarcane. Let’s see howmuch average H&T charges are? 4 x160=640 (+) 1x260=260 total expenditure on H&T comes to Rs.900 Lakh. If wedivide Rs. 900 Lakhs by 5 Lakh MT of crushing the average H&T cost comes to Rs. 160 PMT, the rise in averageharvesting & transport cost is Rs.20 PMT. Now the no profit no loss position is turned into profit, because of fixedcost, it come down from Rs.200 PMT to Rs.160 PMT due to additional crushing. So though the variable costincreased we have earned profit.

3. BUDEGTORY CONTROL

As per the provisions of by-laws and Maharashtra state co-operative societies Act all co-operative sugar factories inMaharashtra prepares their Annual Budget and get sanctioned from AGM. Most of the times it happens thatexpenditures shown in budget are already incurred. As new provisions in Act it is obligatory to conduct the AGMon or before 30th September. But generally most of the annual general meetings are held by sugar factories duringthe month of August and September. In these meeting the mills should put forth the budget of current year andthe coming year also. It is obligatory or compulsory to spend as per budget, and then automatically there will berestrictions on spending without planning and provision.

4. STANDARD COST

Standard cost mean assumed or budgetary cost to be incurred on production or Standard cost formula fixed by Govt. orby a sugar factory on the comparative study of expenses incurred and market scenario of raw and finished goods withbetter financial unit. Standard Cost is related to expenditure incurred on particular account head by the sugar mills ofsame capacity in same geographical region. Some years back Hon. Commissioner of sugar had fixed standard cost to allthe sugar factories which is given below.

1. Power Cost Rs. 16/- PMT2. Process Chemical Expdr. Rs. 24/- PMT3. Repairs and Maintenance Rs. 20/- PMT4. Packing Expdr. Rs. 30/- PMT

When we think about how derive standard cost? There is no define equation or guidelines from any competentauthority. If we want to decide standard cost on sugar mill level, we have to consider the following things. Every yearVasantdada Sugar Institute (VSI) publishes a detailed comparative data factory wise expenditure incurred on particularhead. I think based on the said data we can derive our own standard cost by using following formula.

1. Mean - Means average of expenditure2. Median – Middle of maximum and minimum3. Mode- The number which appears most often in a set of numbers.

To fix standard cost from above option median of expenditure may taken as standard cost of the sugar mills having same production capacity and region.

Let’s see example of standard cost based on the figures of expenditure published in VSI booklet, their capacity and age.

Year 2012-13 (Rs.PMT )

Sr. No.

Name of the sugar Factory

Repairs and Maintenance

Process Chemical

Packing Factory over head

Salary &wages

Power

1 Jawahar SSK 88.86 27.78 51.30 110.08 229.26 7.89

2 Sharad SSK 105.92 23.88 38.99 131.42 300.06 0.00

3 S. M. Kagal SSK 94.39 38.43 78.28 122.22 274.03 16.22

4 Kranti SSK 73.48 43.40 46.40 95.41 171.26 12.07

5 Sonhira SSK 70.66 29.90 69.02 135.27 200.75 9.95

Mean 86.66 32.68 56.80 118.88 235.07 9.23

Mode* 0.00 0.00 0.00 0.00 0.00 0.00

Median 88.86 29.90 51.30 122.22 229.26 9.95*There is no number which appears most often in an above numbers** Data source: Booklet published by VSI

5. STANDARD FOR STORE CONSUMPTION

While considering standard cost we must not only think about how much rupee spent but also think about how muchstore used for production of sugar and for repairs. How we can derive standard use of process chemical, oil grease, limeetc. to avoid unnecessary expenditure? It is good to collect data published in RT(8) C of other sugar factories of samecapacity and then compare the same with use of Lime, Sulphur, Phosphoric acid, Washing soda, Caustic soda,antiscalant, flocculants, Biocides, viscosity reducer, oil and grease etc of our factory. After comparing the use of storewe ourselves may set standard of store consumption.

6. TECHNICAL STANDARDS

Indian sugar industry has its efficiency standards. We should have think about technical performance audit to achieve standard technical efficiency parameters. When we talk about technical parameters like Reduced Mill extraction, Reduced Boiling House Extraction, the ratio of hours lost with hours available etc. it should also correlate in terms of rupee.

7. COST REDUCTION THROUGH FINANCIAL MANAGEMENT

Management practices with professional approach tends to reduce cost and improve the financial performance of a sugar factory by implementing following practices to reduce the avoidable cost and generating additional revenue.

1. Planninga. Short term financial planningb. Long term financial planning

2. Motivation and Coordination

3. Comparison and Comparative Study

a. Cost controlb. Cost analysisc. Cost comparison

i. Comparison with last year’s expenditureii. Inter firm comparisoniii. Comparison with budgetiv. Comparison with standard cost

4. Effective controla. Effective Financial Auditb. Effective Cost Auditc. Effective Management Auditd. Technical Efficiency Audite. Fix Standardsf. Assess Technical loss in rupeeg. Statistical analysis h. Use of modern techniques like Computerization, Automation to avoid human errors, increase efficiency.i. By using modern technology to bring down losses to zero level.

5. Effective Recovery Cell: Create separate recovery cell.6. Raise Funds at Low Rate/Without Interest7. Raise Capital

a. By Selling Additional Sharesb. By Increasing Face Value of Share.c. By Making Beneficiary and Active Members.

8. Raise Deposits/Loans a. Deduct Pre-seasonal Expenditure Depositb. Deduct Modernization and Expansion Depositc. Raise H&T Loan at lower rated. Raise FCNR(B) Loan from Nationalized Bank by converting existing Term Loane. Find out New Sources of Low Rate Funding

9. Related with Labours & Workersa. Motivate Workers to increase their Efficiency & Quality of work b. Inter Departmental training and training from outside agencyc. Consult experts to update advance technologyd. Maintain strict discipline to avoid misbehavior e. Implement Effective Work Procedure

10. Discipline a. Avoid penal actions by timely paying Installments and Government dues.b. Update your knowledge about changes in Govt. Policies, Rules & modern techniques.

11. Effective Marketing Marketing department must have to work hard to get better rates for the finished product of a sugar mill and must update their knowledge of local & International market for grabbing the opportunity available in the market. They have to find out new techniques of marketing and also they have to form separate sales department in the factory. Marketing department should promote, motivate and appreciate the person who helps to increase the benefit of factory.

ACKNOWLEDGEMENT

I take opportunity to express my sincere gratitude to Hon. Shri Vaibhavkaka Nayakawadi, Chairman, PadmabhushanKrantiveer Dr. Nagnathanna Nayakawadi Hutatma Kisan Ahir S.S.K. Ltd., Nagnathanna Nagar, Walve, Tq. Walava, and Dist. Sanglifor allowing me to prepare this paper on “Reduction in Sugar Conversion Cost”. I would also like to thank Shri N. L.Kapadnis, Managing Director for his guidance for preparing this paper.

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